Fitch Ratings: Red Sea Disruptions by Yemeni Houthis to Hit EMEA Industry

Disruptions in the Red Sea are expected to add to the global economic woes by increasing manufacturers’ working capital in Europe, the Middle East and Africa, according to a report. The maritime crisis is expected to affect the free cash flow of industrial manufacturers, a report issued by Fitch Ratings said. The agency noted that ships rerouting from the Suez Canal could increase manufacturers’ working capital needs due to slower transportation of parts and finished products. It further pointed out that rerouting of vessels will limit stops to only major ports, thus increasing the need for feeder services to move containerized goods to their final destinations.

“Fitch expects shipping costs to remain high in the short term, driven by lower global shipping capacity and additional costs of fuel, as well as the resulting rerouting of components through different ports,” said the agency. The report stated: “This will increase both the cost of transport and the amount of work-in-progress and finished goods that manufacturers will need to fund, increasing working capital outflows.” Fitch’s base-case corporate forecasts assume a median free cash flow margin of about 1.5 percent in 2023 and 2024, rising slowly thereafter as orders are delivered, and inflationary cost increases are passed through.

Container line operator AP Moller-Maersk indicated that it could take months to fully reopen the Red Sea to container traffic. According to the Asian Development Bank, the Suez Canal carries around 12% of global trade. About 45% of the Suez Canal’s traffic is currently being diverted around Africa, equivalent to about 50% of cargo by weight, mostly due to the diversion of ultra-large container ships, the report added. “The diversion of ships adds two weeks to the return voyage between Asia and Europe, substantially reducing shipping capacity for containerized, heavy and lower value components,” said Fitch in the report. The agency also pointed out that the cost of sending a container from Asia to Europe has more than doubled in recent weeks.